The 6 most common Personal Finance Mistakes

I have been practicing Financial counseling for the last 5 years. In this journey, I am lucky enough to meet lot of investors, my clients, friends, well-wishers and relatives. I have observed that each individual’s/family’s financial situations, financial behavior and attitude towards investments risk are very unique and different to each other. May be this is the reason why I have always believed that there is no ‘‘one-size-fits-all” financial plan/investment plan. That is why it is called as PERSONAL Finance. It is your finances.

But, I have observed (observing too) one common thing from all these meetings i.e. most of the investors are committing same and common PERSONAL FINANCE Mistakes.

In this post I have tried to list down the top 6 most common and biggest Personal Financial Planning mistakes that many of us commit. These are purely based on my work experience and observations. You are free to share your comments on my views.

Six Most common Personal Finance Mistakes :

Mixing Life Insurance with Investment– This has to be listed as the biggest and the most common mistake that many people commit. The role of investing is to grow wealth while the role of insurance is to protect it. Mixing the two will lead to lot of disappointment.Traditional plans like Endowment, Money back and Whole-life policies are the best examples for this. These plans come with a combination of investment and insurance. I have seen many investors buying these kind of life insurance plans without even trying to understand the plan features, tenure and benefits. In India, Life insurance is sold and not bought in most of the cases. If at all investors buy it, they do so for tax planning purpose only (when they have to submit their tax planning investment proofs ). Don’t get into liquidity trap to save a little on tax . Life insurance is a long term commitment. (Read my post on “Is Term insurance a waste of your money?“)

Buying a Property at a young age through home loan – In India, the decision to buy gold or to invest in a property is more to do with sentiments rather than the actual requirements. I have been observing that as soon as an youngster gets married the first financial decision he/she makes is to ‘own a home.’ This can be a demand from his/her family members (or) due to peer-pressure (or) ‘why pay rent when I can own’ syndrome. Considering the prevailing property market prices, most of us can buy a property through a home loan only. Once you acquire a home loan, around 30% to 40% of your net monthly income goes towards your Home loan EMIs. This may put lot of strain on your Finances. Another important point is that this makes you to postpone the planning for other important Financial goals like, your RETIREMENT PLAN. Your retirement plan is the first thing that you should really care about. (Remember this point – Do not consider your primary home (residence) as an Asset, irrespective of the appreciation of the value of your property)

Not maintaining a Contingency or an Emergency Fund– I have seen people who earn even a ‘five figure’ salary asking for financial help during unforeseen medical emergencies or unfortunate events. They earn well but they do not save. So, what do they do to fund these emergencies? They go and acquire personal loans or take loans on credit cards. This puts them in a viscous circle. They take years together to come out of these loans and have to pay heavy interest amount too. We can also consider the above point (‘mistake-2’) here. I have also observed that people withdraw all their cash reserves, PPF (Provident Fund), EPF etc to fund the down payment while purchasing properties. Do not do that. Have sufficient cash or bank balance, may be 6 months of your monthly (fixed+variable) expenses as an Emergency Fund. If you do not have such fund, start saving in a Recurring Deposit or use your Sweep-in account to create your contingency fund.

Not having sufficient Health Insurance coverage – When I ask a salaried individual about his/her medical insurance plan, I get to hear this answer ” My employer provides health insurance cover.” With rising medical costs and unhealthy lifestyles, do you think that the coverage provided by your employer alone is sufficient? You may ask yourself few of these questions. What happens to my health coverage if i quit or lose my job? Can I afford to buy or get a new medical insurance plan when I retire at 58? What if suddenly my employer changes the terms & conditions of Employees Mediclaim policy? Aren’t you putting your whole family at risk? Have a standalone Medical insurance policy. Have an health insurance plan for all your dependents.

Investing heavily in Fixed Income Securities – Recently, one of my good friends discussed about his personal finances with me. I was shocked to know that monies to the tune of Rs 12 Lakh (30% of net-worth) were in Fixed Deposits and this person is just 30 years old. This person does not have any dependents and no financial commitments. We need to understand the importance of REAL RATE OF RETURN here. Fixed income securities like Bank Deposits, Recurring deposits or Post office small savings schemes generate returns of around 8% to 9%. We all are very much aware about the rise in living expenses (inflation) over the last few years and I am sure that this will be the case in future too. If you make 8% profit on your fixed deposits and inflation is 6% then Real Rate of Return is around 2%. You still have to adjust this 2% for the taxes you pay. That means your wealth/investments are not growing, infact your wealth is getting eroded. Take charge of your finances, you have to invest in equity related instruments to generate long term wealth. Invest atleast a portion of your savings in right Equity and Equity related mutual funds. Invest in and diversify across various asset classes. But, kindly understand the risks associated with each asset class before investing.“Gold, real estate,stocks wont make you rich. How much you know about them will make you rich. Financial literacy is important.( Read my post on “RBI’s data on Financial Savings of the Households.“)

Not setting any Financial Goals– “How much I will get?”, “Can I get 15% guaranteed returns?”, “Is there any investment which can generate 20% returns without taking any risk?, “Share market is at all time high, is this the right time to enter?, “Is this the right time to buy property or gold”…. 🙂 . These are the common queries that I receive on a daily basis. There is only one answer for all these questions. Instead of trying to time the financial markets, we will be better off if we first identify and set financial goals. This will enable you to have clarity about your investment requirements. Take your financial planning seriously and do not postpone investing for your financial goals. (Read my article on “How to create a solid Investment Plan?“)

Few more common mistakes that investors commit are –

Having mob-mentality (Do not rush to follow the crowd, it might be a funeral procession – Robin Sharma). As I mentioned, each financial plan is unique. Your financial situation might be different from your friend’s. Plan your finances based on your risk profile and your own requirements.

Many of us under-estimate the importance of having a written WILL. Do not postpone writing a WILL. Do share details about your investments with your nominees or family members. (Read my post on “How to write a WILL?“)

Many of us do not try to understand about the Salary structure and also about the basics of income tax.

I also get to hear this common sentence frequently – ” Sreekanth, I do not know where my money/income is going..” These days, major purchases (Smart phone, LED TV etc) are financed by debt, not by advance saving, and are often bought impulsively without research. Suggest you to prepare a monthly budget and stick to it. Plan and save for fixed as well as variable expenses.

The Secret of a Financially Happy Living is to Plan for all the Known Events in your life and to Make Provisions for all the Unknown events in your life!!! Personal Finance lessons are often learned through experience. If needed, do take corrective measures right now…better late than never 🙂

Do share your views and comments. Cheers!

(Image courtesy of Chris Sharp & Stuart Miles at FreeDigitalPhotos.net)

Sreekanth Reddy

Sreekanth is the Man behind ReLakhs.com. He is an Independent Certified Financial Planner (CFP), engaged in blogging, financial counseling & property consultancy for the last 6 years through his firm ReLakhs Financial Services . He is not associated with any Financial product / service provider.
The main aim of his blog is to "help investors take informed financial decisions."

Comments

Rajat Mongasays:

December 9, 2016 at 5:24 pm

Hi, great article.
Unfortunately I am a victim of low cibil score and was looking measures to improve it as I also wanted to avail a personal loan to renovate my house. Please suggest me as the banks keep cibil score as the fundamental factor in giving loans.

dear sreekanth can you please suggest me which is the best parsonal accident plan which gives benefit of totaland partial permanent disability and also total and partial temporary disabillity benefit.i have read your blog about personal accident plan and almost decided on appolo munich for a 50lks coverage.but what i find that they are offering only TTD but not partial temporery disablement.please suggest

I believe, partial temporary disability is a condition which can be cured with hospitalization which is also covered in Apollo Munich IPA plan and as an optional benefit in Max Bupa. Apollo Munich also covers broken bones etc. It may be covered in Health Insurance as well.

Dear sreekanth
In addition to my earlier query, i have few more doubts.
I have invested already in Axis long term equity, franklin india tax shield & reliance tax saver. In addition this year i plan to invest in franklin small cos fund.
Should invest in the same above mentioned funds each year like buying more units of axis long term equity or should i invest in different funds each year?

Thanks for your reply
really your blog is an eyeopener for me. initially i thought stocks and shares are difficult to understand and kept away from them. now your blog has rekindled interest in mutual funds.
i already have term life insurance and health insurance for my family
i have few more queries.
1. if i invest in few MF this year (eg-axis long term equity & Franklin small cos fund), during next year and coming years if these funds still do well, is it better to invest in same funds. or should i select different funds so that i may not lose all my money if these funds dont perform well in future.
2. what is the difference between tax saving ELSS and other MF. why some ELSS are given tax exemptions, not others?
3. i used Online Portfolio Overlap Tool. till what percentage of overlap between two MF is acceptable according to you?
awaiting your reply

Dear Hemachandar,
1 – You can make additional investments in the same /existing funds. However let’s say these funds do not perform well (kindly note that it is ok to be at say num 3 or num 4 in rankings, we need to look at consistency) and does not even beat the fund category average for few couple of years or so then one can switch to better and other consistent ones.
2 – ELSS funds are also equity oriented funds and most of them are Multi-cap funds. All ELSS funds are eligible for tax exemptions.
Kindly read:What are Large/Mid/Small cap funds?
3 – There is no IDEAL percentage as such. However let’s say two funds have 90% overlap then there is no point in investing in both the funds.

Dear Sreekanth,
I am 32 years old. Recently invested in ELSS to save tax. I am in 30% tax bracket. My financial goal – purchase a house after 10-15 yrs & also build corpus for long term. My queries-
What is the difference between tax saving ELSS & other MF? After exhausting 1.5L(80c) limit, should i invest in other MF or can i invest further money in tax saving ELSs itself?
Lump investment or SIP? Which is better? (Can afford lumpsum)
Can u suggest what types of MF should i choose to meet my goals (house in 10-15 yrs & long term corpus)?
Hemachandar

Thank u for your advise.
But I think by investing in retirement planning schemes we may get less amount because of scheme providers charges, less risk taking methods, etc. Any how every one at least may have more than 10 years of time for retirement. Instead of investing in retirement planning schemes, it is better to accumulate more fund by investing in equity funds like mid caps & small caps (we have more than 10 years of time frame) which generate more corpus.

Dear harinath,
I believe that slight misunderstanding has happened from your side.
I have quoted ‘retirement planning’ and not investing in any retirement oriented schemes.
My suggestion is same like yours ie one can invest in equity oriented funds or direct equity towards long-term goals like Retirement planning.

I could not able to trace my query like Under which article I posted my query and to know your answers. Make a facility to track this using our mail id.
Also I want to have a suggestion from u.
I am 42 y old with 2 children. Having sufficient term insurance (for 1 c) & Health insurance (for 9 Lakhs – family floater) which is compared with your suggested articles.
I am having a home loan for 25 L started in June 2015 for 10 years duration.
Also I want to have 3 goals.
1. 2 children education ( 12 years old & 5 years Old)
2. 2 children marriage ( 12 years old & 5 years Old)
3. My retirement

At present I can save 2 lakhs per month from my salary. Do you want me to close Home loan with in one year and then start savings. Or shall I continue home loan for 10 years and surplus amount in savings.
Presently I am working Middle East. My family is in Hyderabad.After 2 years I want to come back to India and do a small business which may expect approx. 50000/- per month income.

Kindly suggest me good plan. If u have any paid up plans I can join with you.

Hi Sreekanth,
good day!!!
Above article is an eye opener for the people like me. this is Awesome. keep posting such educative and informative articles to help people.
i have a brother who is42 years old. he is suffering from BP & diabetes. could you please advise which health policy would cover him and his whole family (wife & 3 kids). kindly advise with some good providers names with premiums (if possible) according to his illness.

Dear Abdul,
Your brother can take an independent policy and his family (spouse + kids) can take another policy which can be a Family Floater policy.
Check out this one : http://www.starhealth.in/diabetessafe.php.

This is WOW WOW Article. All the points are very valid especially buying house..Still i too bought the house at young age and swiped off all the deposits and paid the down payment. some how i woke up now..

You are doing a nice thing in waking the people up for investments/Insurance. I really like your comments/suggestions/posts.
But i really don’t agree with points mentioned under “Buying a Property at a young age through home loan”, i think this will demotivate some of youngsters who are thinking of buying a property here or there which itself i suggest is a great investment(even better than Market investments if chosen wisely).
for eg. If one is paying House rent of 20K and an emi of 40K can own him a house(obviuosly with some downpayment), there is no better alternate for this.So, i request you to please delete or rephrase that point.

Dear Prashant,
Thanks for your appreciation!
It is not the case of motivation or demotivation. It’s the fact. I have also mentioned that, this decision of buying property (for self-occupation) at young age and that too with a loan, can make you to postpone the other important goals.

I have also observed that, as soon as one acquires a home loan, he/she is in a hurray to repay it. Uses bonus amounts, gifts etc.,

My view is not to discourage investing in property, but to encourage to prioritize the fin goals. If one can allocate monies to fin goals like retirement etc., and still can afford to pay Home loan EMIs then ..Go ahead!

Would like to know your opinion above NSP for retirement. Do you think it is sufficient ( of course it depends how much you are contributing and what one needs after retirement ), But is it sufficient to relay on one instrument. I believe it works in similar manner to MF.

Dear Bikash,
If an individual (employee) had to compulsorily make contributions to NPS then we can’t do much about it (Contribution is mandatory for all government employees).
Else, it is better to avoid. I prefer financial products which are simple, easy to understand, products which offer control/flexibility and tax efficient.
I believe NPS does not satisfy most of the said requirements.
MFs are more liquid, offer flexibility /control and are tax efficient ones.

Hi Sree,
It very usefull for me as well those who are planning for their future investments. i’m trying convince my close friends to understand the insurance is not a investment it’s to safeguard our loved one but they are saying “term insuracne” not give return. anyway i will succeed soon. my friend to get understand what is insuracne soon.

Dear Santanu,
Thank you.People should also first start asking right questions, understand the basic features and then invest in right insurance plan ( on any given day, i would suggest term insurance only).
Insurance is sold aggressively in India and not bought. Unfortunately unwanted & bad insurance is sold aggressively.

About the point on buying homes, there is whole bunch of people doing this in India and it makes me to believe that buying a home for living is an important thing to do ! Why do you say that buying a home with loan is not the right approach… most of these young guys start the housing loan may be in their late 20’s and complete the loan by late 30’s , so they anyways still have 20-25 yrs left in their productive age .

Dear Krishna,
My point is – Buying a home with loan can be a right approach after allocating sufficient savings towards Retirement and other important goals. I have seen many individuals (in early 30s) who struggle to pay Home loan EMIs, manage Kid’s Primary education expenses and meet rising living expenses.

Late 20’s is the time to invest as much as possible in risk-oriented investment options and leave them for long term wealth creation.

Off-late, I have met few clients who lost their jobs (IT industry) but have home loan EMIs and other financial commitments too.

So, if someone takes a home loan (which is within his/her limits, not over-leveraged) and still allocate savings towards important financial goals then it is absolutely fine.
Actually there is nothing right or wrong solution here. As long as you are comfortable and do not experience any strain with your finances, its all ok.

Dear Pradeep Sir,
I did not get you.
You mean to say that I should have mentioned in the article itself about – ‘nothing wrong in buying a property with home loan as long as an individual saves and invests money for other goals too.??